Why AMD Stock Could Rise as PS5 and Xbox Supply Levels Off

AMD (AMD -0.61%) is one of the world’s leading semiconductor companies, providing computer hardware such as CPUs, motherboards, graphics cards, etc. for some of today’s most sought-after technologies. Shares of the company are down more than 20% in the past six months, but that could change thanks to AMD’s key position in the production of sony (SONY -0.37%) PlayStation 5 and Microsoft (MSFT -0.47%) Xbox Series X/S.

Sales up despite chip shortage

AMD provides processors and graphics cards for these two main video game consoles today. Sony announced that it sold 10 million PS5s in July 2021, making it the best-selling console in company history. Microsoft also revealed the same month that its Xbox Series X/S consoles were its “best-selling consoles to date, with more consoles sold to date than any previous generation.” Both gaming machines were first released in November 2020 as a new console generation, replacing the PlayStation 4 (2013) and Xbox One (2013).

Image source: Getty Images.

Sony and Microsoft reported skyrocketing console sales amid the COVID-19 pandemic, which has strained the tech world’s supply chain. Advances in technology increased demand for semiconductors by 17% from 2019 to 2021, and when shutdowns shuttered factories, higher demand and lower supply led to a continued shortage of chips. Almost every tech industry has been hit by the shortage, from automakers to smartphone retailers. Yet Sony and Microsoft still managed to achieve impressive sales despite their inability to fully meet consumer demand.

As the pandemic subsides and semiconductors become more readily available, AMD will be able to supply more of its products, putting more game consoles on shelves and in homes. Sony Senior Vice President Veronic Rogers said on June 3, 2022 that the company plans to significantly increase PS5 production this year. Microsoft, on the other hand, has been paying a variety of factories for chip priority in an effort to ramp up Xbox Series X/S production.

A win for Sony and Microsoft is a win for AMD

AMD divides its revenue into two segments: “Computing and Graphics” and “Enterprise, Embedded and Semi-Custom”. The former encompasses the company’s PC processors, chipsets, and graphics hardware, while the latter is its enterprise processors and custom architectures, such as those found in PlayStation and Xbox consoles. Of AMD’s $5.9 billion in Q1 2022 revenue, $2.8 billion came from computing and graphics, while $2.5 billion came from enterprise, embedded and semi-personalized.

Interestingly, while Computing and Graphics brought in $723 million in operating revenue for AMD, Enterprise, Embedded, and Semi-Custom brought in $881 million. The company essentially keeps $0.26 for every dollar of revenue made in the first segment, while the second – containing game consoles – earns $0.34.

AMD does not report individual sales figures for each company it supplies its products to, nor does it detail how much of its enterprise, embedded, and semi-custom sales come from console chips. But the higher margins in the enterprise, embedded and semi-custom category suggest that any significant sales growth there will boost earnings. AMD’s latest quarterly report also attributed its recent sales growth in this segment of PS5 and Xbox Series X / S sales.

Additionally, Sony and Microsoft will almost certainly release more powerful “Pro” versions of their consoles as the build continues. Both companies did this with their previous generation of consoles, releasing the initial consoles in 2013 and then a pro version three to four years later. Professional consoles would also draw their power from AMD’s high-end processors and graphics card technology, helping the company’s growth.

If supply chain constraints persist in the tech industry, Microsoft and Sony may not be able to meet consumer demand for their consoles, which will hurt AMD. However, with COVID-19 easing and countries reopening, stocks should continue to improve. By supplying hardware in Sony and Microsoft consoles, AMD benefits whichever console comes out on top – and that’s before you even consider that the company has supplied similar components for the increasingly popular Steam Deck from Valve, a portable game console.

A good long-term buy

AMD’s share price looks unusually low compared to its stellar recent earnings. The company’s revenue totaled $16.4 billion in 2021, up 68% from the prior year. Likewise, its gross profit was $7.9 billion in 2021, up 82% from 2020.

AMD PE Ratio Chart

AMD PE Report given by Y-Charts

The semiconductor company’s price-to-earnings ratio is currently well below its long-term average, suggesting its recent stock price doesn’t reflect AMD’s true value. Maybe chipmaker stock investors are nervous about the recent chip shortage or just uncomfortable investing in the tech, but whatever the reason, the price looks likely to go up. bounce back in the long run.

As the stock of both consoles has been extremely low since their launch, it would be worth checking the supply of local stores. If stores like GameStop, Target, Walmart, and others can keep the PS5 and Xbox Series X/S on the shelves, that will mean inventory has finally stabilized, and AMD is taking advantage of that.

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